Friday, May 22, 2015

Sri Lanka maintain rates as inflation seen at low levels

Sri Lanka's central bank maintained its benchmark policy rates, with inflation projected to "remain at low levels in the months ahead."
The Central Bank of Sri Lanka, which cut its policy rates by 50 basis points in April, added that the recent US$ 400 million currency swap agreement with the Reserve Bank India had strengthened reserves and together with expected capital inflows, including tourism and workers' remittances, will improve the country's balance of payments during the year.
Sri Lanka's consumer price inflation rate was steady at 0.1 percent in April and March, well below the bank's target of 3.0 to 5.0 percent, reflecting a downward revision in energy prices and lower prices of consumer items.
The International Monetary Fund (IMF) forecasts average inflation this year of 1.7 percent, with inflation ending the year at 3.2 percent, and averaging 3.4 percent in 2016. Gross Domestic Product is projected to expand by 6.5 percent this year and beyond, down from 7.4 percent in 2014 and 7.2 percent in 2013.
Sri Lanka's GDP expanded by an annual 6.4 percent in the fourth quarter of 2014, down from 7.7 percent in the third quarter.
The central bank maintained its benchmark Standing Deposit Facility Rate (SDRF) at 6.0 percent and the Standing Lending Facility Rate (SLFR) at 7.50 percent.

The Central Bank of Sri Lanka issued the following statement:

"Monetary Policy Review – May 2015

Following the reduction in policy rates of the Central Bank in April 2015, market
interest rates have adjusted downwards as expected. The continuation of the low interest
rate regime has induced demand for bank credit from the private sector. Accordingly, credit
obtained by the private sector from commercial banks increased by 13.9 per cent in March
2015 on a year-on-year basis. In absolute value terms, the increase during the month was
Rs. 41.4 billion, raising the cumulative increase in credit to the private sector by
commercial banks to Rs. 86.9 billion in the first quarter of 2015. As per the Quarterly
Survey of Commercial Banks’ Loans and Advances to the Private Sector, the sustained
expansion in credit was driven mainly by credit flows to the Industry and the Services
sectors. Given continued low market interest rates, it is projected that private sector credit
would increase further in the period ahead supporting the growth momentum of the
economy. As a result of increased credit flows to both private and public sectors, broad
money (M2b) grew by 12.5 per cent in March 2015 on a year-on-year basis, along the
expected path for monetary expansion.
Inflation, as measured by the year-on-year change in the Colombo Consumers’ Price
Index (CCPI), remained at 0.1 per cent in April 2015 unchanged from the previous month.
Year-on-year headline inflation has remained below 1 per cent from February 2015 largely reflecting the downward revision of domestic energy prices and the reduction in prices of
selected consumer items. Annual average inflation declined further to 2.1 per cent in April
2015 from 2.5 per cent in the previous month. Meanwhile, core inflation, on a year-on-year
basis increased to 2.4 per cent in April 2015 from 1.4 per cent in March, with price
increases being recorded mainly in non-food items such as health services and clothing.
Going forward, with improved domestic supply conditions and subdued prices of key
commodities in the international market, it is projected that inflation would remain at low
levels in the months ahead.

In the external sector, the recent currency swap agreement with the Reserve Bank of
India amounting to US dollars 400 million has strengthened official reserves of the country.
The realisation of expected capital inflows in the period ahead and sustained regular inflows
in the form of earnings from the export of goods and services, including tourism and
workers’ remittances would improve the balance of payments during the year. So far in
2015, the Sri Lankan rupee has depreciated against the US dollar by around 2.0 per cent.
In this background, the Monetary Board was of the view that the current monetary
policy stance is appropriate. Accordingly, the Monetary Board, at its meeting held on 21
May 2015, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing
Lending Facility Rate (SLFR) of the Central Bank unchanged at 6.00 per cent and 7.50 per
cent, respectively.